Buy Dr. Agarwal`s Health Care Ltd for the Target Rs. 530 by Motilal Oswal Financial Services Ltd
Merger synergies to drive EPS accretion
The completion is expected in 12-24 months, subject to approvals
* The proposed merger of Dr. Agarwal Eye Hospital (AEHL) with Dr. Agarwal Healthcare (AHCL) would consolidate the businesses of AHCL and AEHL into a single entity.
* This merger would drive better operational and financial efficiency, enhancing the value of overall business through unified capital allocation.
* With this merger, on pro forma basis, the minority interest related to a 28% stake of public shareholding in AEHL will be eliminated. The total number of equity shares of AHCL would increase due to the issuance of new shares to AEHL. This transaction would be EPS-accretive for AHCL by 5-7% for FY27.
* AHCL remains on track to a) expand its pan-India presence, b) enhance its hub-spoke model network, c) provide superior technology service in eyecare, and d) gain market share in the fragmented eye-care industry. We value AHCL on an SOTP basis (25x EV/EBITDA for the surgery business, 15x EV/EBITDA for the opticals business, 13x EV/EBITDA for the pharmacy business, adj for a stake in Dr. Agarwal Eye Hospital/Thind hospital) and arrive at a TP of INR530. Maintain BUY.
Merger details
* The boards of directors of AHCL and AEHL have approved the scheme of amalgamation of AEHL with AHCL, creating a single listed entity housing the entirety of Dr. Agarwal’s operations.
* Moreover, AEHL is proposing a preferential allotment of INR700m to AHCL to finance ongoing capex requirements.
* As part of this, AEHL will issue ~2.7% of its post-issue capital to AHCL through the preferential allotment at INR5,270/share, amounting to INR700m. This will be followed by the merger of AEHL into AHCL via the scheme of amalgamation.
* Under the proposed merger terms, shareholders of AEHL (excluding AHCL) will receive 23 equity shares of AHCL for every 2 equity shares held in AEHL, representing a 15% premium to AEHL’s 10-day VWAP.
* The merger will be subject to requisite approvals from shareholders, stock exchanges, SEBI, and the NCLT.
Timeline snapshot
* 2QFY26: The boards of AHCL and AEHL approved the proposed merger scheme. The shareholders’ meeting to consider approval for the preferential issue will be held during the quarter.
* 3QFY26: Stock exchange approval expected; preferential issue is expected to be completed.
* 4QFY26: Shareholders’ and creditors’ meetings to consider approval of the merger scheme.
* 2QFY27: NCLT order expected, enabling the listing and trading of new shares.
EPS-accretive for AHCL shareholders
* Currently, AHCL holds a 71.9% stake in AEHL. Accordingly, the financials of AEHL are consolidated within AHCL and the minority interest related to 28.1% public shareholding is deducted for calculating PAT post minority interest.
* After the merger, this minority interest related to AEHL would be eliminated. Subsequently, the total number of equity shares would increase to 331m due to the issuance of new shares to AEHL public shareholders.
* Considering both aspects, our FY27 EPS estimate would increase by 5-7%.
Valuation and view
* Currently, on pre-merger basis, we estimate a CAGR of 20%/21%/39% in revenue/EBITDA/PAT over FY25-27.
* AHCL is enhancing its services at the existing centers to cater to increased requirements of patient pool. Additionally, it is making in-roads to new micro markets to further intensify the growth prospects.
* Also, it is expanding its doctor pool to cater to rising demand within eye-care. Maintain BUY.
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